Does anyone use third parties for operational diligence?

April 17, 2024

by a searcher from Cornell University in Zionsville, IN 46077, USA

Hi All,

I'm seeking operational diligence and value-creation strategies. Does anyone use or recommend external operational diligence services?

Best,

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Reply by a searcher
from University of Michigan in Bay City, MI, USA

Thanks for the tag, ^redacted‌. I agree most strongly with what ^redacted‌ has said. Operational diligence for manufacturing is very difficult because it's so often bespoke to the industry or even just the specific company. While there can be best practices, they almost always need to be tweaked for any given company.

If you're not instinctively strong in operations - specifically the day-to-day, meat-and-potatoes aspect of the actual making of the goods - I think the right DIY approach is to just double down on the financial diligence to make 100% sure you understand the full cost structure for COGS, inventory, the order-to-cash cycle, etc. If that is totally accurate and acceptable, then you know that the way they're currently operating can be sustainable. You would treat any potential operational improvements as gravy rather than a core value-add to your thesis.

I'm not sure how much value a third party would bring to the table. I'm not saying zero, but an ops audit wouldn't be like a QoE or something where a standard process can give you a totally accurate and objective analysis fairly quickly and easily.

If you aren't ops-oriented and don't have an ops-oriented person on your team, you could be wading into dangerous waters if you're buying from a seller who has that as his or her main focus. I'm not sure that can be diligenced away.

Reply by an investor
from Illinois Institute of Technology in Pasadena, CA, USA

Markets/customer loyalty: You can consider engaging consultants (and with the ok from the sellers of the “script” you will use) conduct a highly confidential survey regarding the target company in a group of competitors to the target. Find out why customers use these companies (and the target), would they continue using them in the future, why are some better, trying to single out specific info on the target. Also, get close to the board members of the industry trade association (who will typically own/operate companies that compete with the target) and quiz them on the industry, leaders in the industry, and of a sample of 5-10 companies (one of which is the target) what are the parameters that lead to their success. Internal operations: Similarly engage in conversation with key vendors (and again with the ok from the sellers of the “script” you will use) who know the target and the target’s competitors. Find out if the relationship with these companies, how do does the target stack up relative to other customers of those vendors, are the competitors (including the target) using latest technology, what is the vendors assessment of the condition of these company’s (again include the target) operations/plant/equipment.

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